DataDog (DDOG) provides monitoring and analytics platforms for developers. The company’s SaaS platform integrates and automates infrastructure to the convenience of developers and scientists. I am bullish on the stock.
Growth Prospects
KeyBanc analyst, Michael Turits, raised his rating on DataDog to overweight with a price target of $210, citing the company’s cloud-platform modernization as the catalyst.
According to Turits: “Even with Datadog at [more than] $1 billion revenue, we see opportunity for sustained high growth within an expanded [total addressable market], ongoing Observability share gains, and potential for greater than historical share leadership given Datadog’s high pace of innovation across cloud and modern workload use cases.”
I firmly agree with Turtis’ analysis. DataDog is in an aggressive re-investment phase, with its CapEx growing 83.9% during the past 12 months. DataDog’s developing partnerships with large-scale clients such as Amazon Web Services is a driving force behind the company’s growth as it raises the barriers to entry for new competition.
DataDog blasted past earnings estimates during its fourth quarter with a $34.8 million revenue beat. After the report, the company provided guidance on its prospects, stating that it expects revenue to reach $334 million to $339 million, which translates to approximately 4% quarterly growth.
From a Market Perspective
Volatility rarely provides help in hand for growth stocks, and this is apparent in DataDog’s case, with the stock down over 23% from its highs, as the volatility index has skyrocketed amid geopolitical tensions and unclear monetary policy.
The U.S. 10-year yield is inverting, which indicates that the market is expecting a series of short-term interest rate hikes but, in turn, a low amount of increases in the future. The knock-on effect on the economy would be dampening short-run consumer spending and increased spending in the long run.
The stock market is forward-looking, and its recent drawdown reflects the fact that this pattern may have already been priced-in. So, in other words, we could see a resurgence in growth stocks such as DataDog.
I believe that solid companies make for solid stocks in the long run. Considering DataDog’s strong industry position, I think we may be looking at the start of another surge in its stock price.
Wall Street’s Take
Turning to Wall Street, DataDog has a Strong Buy consensus rating, based on 14 Buys, two Holds, and one Sell assigned in the past eleven months.
The average DataDog price target of $213.63 implies 40.1% upside potential.
Concluding Thoughts
DataDog holds a strong industry position, and the modernization of its cloud platform is seen as a massive add by KeyBanc as well as myself. The stock has shown resilience in a drawdown of growth stocks, and if it continues to produce the earnings it did in Q4, we’re likely to see a reignited growth stock soon.
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